Customer Lifetime Value
The RFM Principle
The RFM principle stands for Recency, Frequency and Monetary Value. Using these three principles you can develop your customer loyalty program through calculating customer lifetime value, or put simply, how important the purchase patterns of each customer is to your business. This is achieved by monitoring their purchases over time and selecting a weighting factor for each of the areas of;
You then apply a factor to each area, for example,
For Monetary Value;
By using the RFM principle you can clearly see which customers are the most important to your business, based the relevance that you select. Many businesses just concentrate on the big money customers, and their focus is on the purchasers of volume products.
Whilst this is reasonable approach, the facts are that these are the most vulnerable group of customers by far. Some of these customers may buy big and not very often, which means they could be ripe pickings for your competitors, when time is right, and when you least expect it!
The RFM Principle and the 80/20 Rule
Many people associate the RFM principle with the 80/20 rule (or Pareto's Law). The process does condense the customers purchasing patterns in some form of 80/20, whereby 80% of the sales come from 20% of the customers and this is a further extension of analysis that you can derive from this process.
And as a result of these activities you can then monitor their progress through the RFM process, this will also aid in the evaluation of the effectiveness of your marketing activities.
See also 80-20 rule
Developing a Customer Loyalty Program
When you use the RFM principle you can also easily develop a customer loyalty program based on the purchasing patterns of your customers. Where you have points assigned for Recency, Frequency and Monetary Value, you could assign the same amount (or a different points concept) of points for loyalty to your product or service.
View the RFM Principle Template
You can purchase a copy of our RFM template which gives you both full instructions on how to set-up and use this process and provides you with a blank version to set up your own list of customer purchases so you can develop your Customer Lifetime Value using the RFM principle!
Purchase Price - $7.95 (USD)
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